Growing worries about the economic impact of higher oil prices, which hit 21-year highs last week, sent share prices plummeting in Bangkok by 2.2% and Hong Kong by 1.4%. Bourses in Tokyo, Jakarta, Kuala Lumpur, Seoul and the mainland China cities of Shanghai and Shenzhen also closed down, by 0.4% to 3%, for much the same reasons.

The only markets to finish higher were Singapore, up 2.1%; Manila, by 1.6%, and Taipei, 1%.

While oil-price fears may have cast a long shadow over markets in the region, for some Chinese stocks, rising crude prices have meant stronger earnings and higher share prices.

China's main markets have been in the doldrums for most of this year. The blue- chip Hang Seng index is down nearly 3.1% since the start of 2004, while the benchmark Shanghai and Shenzhen indexes, which track both local-currency A shares and foreign-currency B shares, are both off -- Shanghai's by 1.5% and Shenzhen's by 3.8%. But that hasn't stopped many foreign investors from loading up with the shares of companies that produce, refine and market crude and oil products, such as refiner
China Petroleum & Chemical,
or Sinopec; mainland oil producer
PetroChina,
the nation's chief producer, and offshore crude producer
CNOOC.

For this group, higher oil prices have bolstered their bottom lines and sent analysts scurrying to lift their earnings projections for this year.

For example, Cr&eacute;dit Suisse First Boston recently raised its earnings estimates for PetroChina for 2004 by 1%, for CNOOC by 9.6% and for Sinopec by 6.9% after increasing its projection for oil prices in the second half of this year.

The shares of most of those companies have outperformed the general market this year. For example, while Hong Kong's Hang Seng China Enterprise index, which quotes H shares (the stocks of mainland companies listed in Hong Kong), closed Friday down 0.31% year-to-date, shares of CNOOC are up 23.35% over the same period, COSCO is ahead by 7.25% and China Merchants is up by 4.39%. Although China Shipping, Sinopec and PetroChina are down year-to-date by 10% to 12%, the share-price drops have been due more to technical reasons than eroding fundamentals. Shares of China Shipping, for example, have appreciated 62% over the past 12 months and popped 3% recently on news that it would likely post a 50% increase in first-half profits through June 30.

"China's main stock market is unlikely to do well this year, but certain sectors like energy could end the year on a high note," says David Zhang, who heads a four-person equity-research team at Dynasty Asset Management. The Shanghai-based money manager oversees some $180 million in separate accounts and two hedge funds.

"Oil stocks are core holdings for our funds and individual accounts," the 30-year-old research chief explains. "Despite government efforts to slow down the economy, the mid-to-long-term outlook for increasing oil consumption remains solid."

He adds: "China has a voracious appetite for oil, which will remain undiminished no matter what the government tries to do. And oil-company profits -- and their share prices -- will remain stable even if global prices drop to the $30-to-$35-a-barrel level later this year."

Even though China is the world's fifth largest producer of oil, its high-octane economic growth in the past decade has turned it into a net importer of oil since 1993. And despite current forecasts suggesting China's growth may slow to 8% to 9% this year, from a current rate believed to be 11%, questions are arising about whether the country's economy is, in fact, slackening.

Whether or not it is, China's oil-demand growth is double that of the world average, and imports of crude and oil products are growing at a 15% to 20% annual clip.

Naturally, this bodes well for a company like China Shipping, which is the country's second-largest shipper and the biggest in terms of coastal shipping. It transports crude oil and refined products and coal and other dry-bulk goods, with oil transport the most important profit driver -- 72% of earnings before interest and taxes, according Sam Lee, an analyst with Deutsche Bank in Hong Kong.

Some 61% of China Shipping's gross revenues ($600 million in 2003) is from domestic shipping, mainly carrying coal to inland factories, while the rest is international, mostly shepherding crude to coastal refineries. And about 62% of the company's revenues are from long-term contracts of one year or more.

On a recent overcast morning in Shanghai, Barron's accompanied Dynasty Asset Management's Zhang to China Shipping's headquarters in the city's waterfront district. The neighborhood borders the Huang Pu River, which connects China's longest river and main east-west waterway, the Yangtze, with the China Sea.

Zhang's portfolios have small positions in the blue-chip stock, but he wants to find out whether he should add to these holdings. He says China Shipping's shares may be as much as 50% undervalued, based on capacity expansion and earnings growth this year and in 2005. The company's earnings, he notes, have been growing on average by 68%, and while he doesn't expect that pace to continue, he wants to gain some idea of future growth rates.

China Shipping's H shares closed on Friday at 5.15 Hong Kong dollars (66 U.S. cents), down 25 Hong Kong cents on the week and 20% below its 52-week high of HK$6.50 last February. Zhang believes they could bounce back to HK$6 by the end of the year, based on a sharp rise in operating profit margins to 30%, from last year's 26%, owing to increases in shipping capacity -- as much as 30% next year -- and higher freight rates for transportation of domestic coal and cargo to inland cities and towns.

That could push the company's per-share earnings to HK40 cents this year and HK49 cents for 2005, compared with last year's HK30 cents and 2002's HK4 cents. "Capacity expansion will be the main earnings driver next year and beyond," says Zhang.

He is encouraged by what he hears from Yan Tong, China Shipping's head of investor relations, who tells him the company is giving analysts guidance of a 50% year-on-year increase in half-year profits through June 30.

Yan also tells Zhang that the company is planning to expand its transportation capacity by 1.26 million tons over the next three years, mainly through the addition of huge VLCC-type tankers. "We will take delivery of one VLCC tanker later this year and hope to add another nine carriers within three years," she tells the fund analyst and his guest.

Zhang's optimism about continuing strong consumption levels is reinforced by mention of plans by Beijing officials to boost China's oil reserves, currently near zero, to a 30-day supply within five years and a 60-day supply within 10 years.

The government also wants to raise the share of oil transported to China in Chinese ships from 20% to 50% of all imported oil, which would mean China Shipping would probably be able to increase its share from 10% at present to 15% or more as its oil-tanker fleet expands to 95 ships by 2005 from 88 at present. The company currently expects to have 185 oil and dry-cargo vessels of all types by then, up from 173 this year.

The only fly in the ointment would be a drastic downturn in the global economy that would lessen the need for Chinese products in overseas markets, and hence cut demand for oil from Chinese manufacturers.

But Yan says she isn't worried. "Even if the economy does slow," she says, "China's need for oil will continue to grow, and our company's stature as the main carrier of this vital resource will grow right along with it."

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